How the crypto industry reacts to recent bank bailouts

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In its ear­ly days, cryp­to enthu­si­asm was fuelled by the promise to cut the rigged bank­ing sys­tem out of the people’s basic need to exchange goods and funds. To some degree, it still is. But as dig­i­tal assets become more and more inter­twined with a larg­er finan­cial mar­ket, this ten­sion grad­u­al­ly fades away. 

The recent wave of par­tial bailouts of failed insti­tu­tions such as Sil­ver­gate Bank, Sig­na­ture Bank and Sil­i­con Val­ley Bank (SVB) has not raised any con­cerns among the cryp­to com­mu­ni­ty. More­over, the Unit­ed States Fed­er­al Reserve Sys­tem came as a sav­ior, at least in regard to USD Coin (USDC) issuer Cir­cle, which kept a sig­nif­i­cant por­tion of its reserves in Sig­na­ture Bank and SVB.

If the Fed decid­ed to let the banks fail, we would prob­a­bly have wit­nessed anoth­er sharp dip in the cryp­to mar­ket and not the opti­mistic resur­gence of the last two weeks. 

Does this mean that the cryp­to indus­try has come to a point where it is high­ly depen­dent on tra­di­tion­al bank­ing and can­not con­tra­pose itself as an alter­na­tive any­more? Is that kind of inter­con­nect­ed­ness desir­able for dig­i­tal assets or should the indus­try cre­ate some dis­tance from tra­di­tion­al finance (Trad­Fi)?

Was it a bailout?

Tech­ni­cal­ly, both SVB and Sig­na­ture were bailed out, but econ­o­mists are high­light­ing the major dif­fer­ence between the cur­rent solu­tion and the U.S. government’s actions dur­ing the eco­nom­ic cri­sis in 2008. 

“Dur­ing the [2008] finan­cial cri­sis, there were investors and own­ers of sys­temic large banks that were bailed out,” as Trea­sury Sec­re­tary Janet Yellen explained, but this time, it was depos­i­tors who got their back cov­ered by the Deposit Insur­ance Fund, sup­plied by the banks, not taxpayers. 

The Fed­er­al Deposit Insur­ance Cor­po­ra­tion (FDIC) has effec­tive­ly guar­an­teed all deposits at both banks beyond its nor­mal lim­it of $250,000 per account. Still, it was only due to the FDIC’s sup­port that Cir­cle was able to with­draw the whole $3.3 bil­lion deposit from the SVB and save USDC from fur­ther depegging.

Recent: US enforce­ment agen­cies are turn­ing up the heat on cryp­to-relat­ed crime

Still, isn’t there some­thing odd about an indus­try with a strong anti-estab­lish­ment and even anti-Fed back­ground tak­ing fed­er­al back­ing for grant­ed, if not out­right advo­cat­ing for it? 

Maybe not, as no speak­er Coin­tele­graph has reached out to sees any eth­i­cal con­tra­dic­tions here. There’s an over­lap between the cryp­to com­mu­ni­ty and the start­up com­mu­ni­ty, so there’s nat­u­ral­ly been a lot of sup­port for the bank bailouts, Daniel Chong, CEO and co-founder at Harpie, explained:

“I per­son­al­ly don’t see a dis­so­nance here: You can be a Trad­Fi skep­tic and still be in favor of star­tups hav­ing a way to con­tin­ue oper­a­tions and make pay­roll. We don’t need thou­sands of employ­ees miss­ing pay­checks to prove that DeFi is a viable finan­cial system.”

Although the DNA of the cryp­to com­mu­ni­ty would oppose a bailout, Tony Petrov, chief legal offi­cer at risk man­age­ment plat­form Sum­sub, told Coin­tele­graph that, some­times, it is very impor­tant to at least attempt to save valu­able insti­tu­tions on the bor­der of cryp­to and fiat — espe­cial­ly giv­en the obvi­ous scarci­ty of such institutions.

Then-Sen­a­tor Barack Oba­ma argues in favor of the Emer­gency Eco­nom­ic Sta­bi­liza­tion Act of 2008 before the Sen­ate in Decem­ber of that year.

Of course, bailouts have gained a neg­a­tive con­no­ta­tion not only with­in the cryp­to com­mu­ni­ty. In some cas­es, a bailout looks like bil­lion­aire exec­u­tives get­ting tax­pay­er-fund­ed hand­outs in exchange for their own poor deci­sions. The phi­los­o­phy of “too big to fail” is help­ing utter­ly inef­fec­tive and ill-gov­erned banks to stay where they are, even if they don’t pro­vide real val­ue to the soci­ety where they exist. But, Petrov con­tin­ued, it’s hard to deny that what hap­pened to SVB, Sil­ver­gate and Sig­na­ture was not a clear exam­ple of mis­man­age­ment sole­ly on the side of the banks’ executives:

“After all, they invest­ed in gov­ern­men­tal notes, not in some shady dig­i­tal coins, the val­ue of which can hard­ly be pre­dictable even with­in one day. Tak­ing this top­ic very soft­ly, it can be claimed that a part of the blame for the con­se­quences should be borne by the U.S. government.”

Is crypto really to blame?

Although the pan­ic among cryp­to investors fol­low­ing the FTX deba­cle played a role in deplet­ing the bank’s cryp­to deposits, Signature’s prob­lems were much more deep-root­ed, Ahmed Ismail, CEO of liq­uid­i­ty aggre­ga­tor Flu­id, told Cointelegraph. 

The bank served a tight­ly knit set of cus­tomers, includ­ing a group of star­tups and their investors. Ismail said that it aimed for rapid growth with­out ade­quate­ly diver­si­fy­ing its busi­ness or clientele:

“Truth be told, busi­ness­es deal­ing with such tight­ly knit cus­tomer cir­cles always face the risk of expe­ri­enc­ing a domi­no effect.”

Petrov also doesn’t buy into the hypoth­e­sis that cryp­to is to blame for the banks’ col­lapse. Speak­ing to Coin­tele­graph, he high­light­ed the com­mon prob­lem of Sil­ver­gate and SVB, which was, iron­i­cal­ly, their faith in U.S. Trea­surys. By rais­ing inter­est rates, the Fed­er­al Reserve nat­u­ral­ly dropped their val­ue, and the simul­ta­ne­ous tur­moil at SVB pro­voked a bank run.

Some posit that it is the cryp­to indus­try itself whose finan­cial sta­bil­i­ty is being under­mined by inter­con­nect­ed­ness with the bank­ing sys­tem: more specif­i­cal­ly, by the extreme lim­i­ta­tions of that con­nec­tion. The cryp­to mar­ket has been backed into a cor­ner of the tra­di­tion­al bank­ing sys­tem, Chong claimed. 

Even before the col­lapse of Sig­na­ture, SVB and Sil­ver­gate, there were only a hand­ful of enti­ties will­ing to bank cryp­to com­pa­nies. It’s impos­si­ble for a cryp­to com­pa­ny to diver­si­fy its assets across many dif­fer­ent insti­tu­tions since there aren’t 20 banks that will have it: 

“The idea that ‘cryp­to is too risky to bank’ has become a self-ful­fill­ing prophe­cy. The few insti­tu­tions will­ing to bank with cryp­to com­pa­nies face very high demand from a mar­ket that has nowhere else to go. They become ‘cryp­to banks’ by default, and all the risks inher­ent in these fast-mov­ing mar­kets end up con­cen­trat­ed in a few institutions.”

What is to be done?

What can the cryp­to indus­try do to escape the sud­den dan­gers of rely­ing upon banks? Not much. The para­dox is obvi­ous: Cryp­tocur­ren­cies won’t need banks if they some­how become the major means of exchange and accu­mu­la­tion, but the only way for them to get to this utopi­an point lies through their inter­change­abil­i­ty with fiat mon­ey. To Petrov, because of that exchange­abil­i­ty demand, build­ing a fence against Trad­Fi looks like a coun­ter­in­tu­itive idea. 

An inde­pen­dent world of cryp­to remains a great lib­er­tar­i­an promise, but noth­ing more, he explained, “In the back­ground of the melt­down of three huge cryp­to-friend­ly banks, we saw the surge of BTC for more than $8,000 in 10 days. This is evi­dence that there is no dis­tance between fiat and cryp­to: They com­mu­ni­cate as the venous cir­cuit and the arte­r­i­al cir­cuit in a human organism.”

Oliv­er Chap­man, CEO of sup­ply chain spe­cial­ists OCI, also doesn’t see how cryp­to can escape Trad­Fi. All in all, it is Trad­Fi that has stepped in to sup­port a bank that was cru­cial for the cryp­to indus­try, he told Cointelegraph. 

The cryp­to indus­try may or may not dis­tance itself from Trad­Fi, but if it does, it will either be tiny and unim­por­tant or pose a sys­temic risk, Chap­man said, stat­ing, “Finance is either impor­tant or we return to the caves. And whether that finance is tra­di­tion­al, cryp­to or a com­bi­na­tion, when things go wrong, a sys­tem­at­ic cri­sis that could pre­cip­i­tate a dis­as­trous glob­al reces­sion remains a danger.”

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The cryp­to econ­o­my can con­tin­ue improv­ing its per­for­mance with­out direct­ly con­flict­ing with banks and sim­i­lar tra­di­tion­al finance insti­tu­tions, Ismail stat­ed. It has already made finance more acces­si­ble and cost-opti­mized by cut­ting out cost-bear­ing inter­me­di­aries. More­over, using cryp­tog­ra­phy and smart con­tracts in decen­tral­ized finance has enhanced the system’s secu­ri­ty with­out com­pro­mis­ing effi­cien­cy. But there’s noth­ing inevitable about the con­flict between the two sys­tems, Ismail said:

“I don’t see why tra­di­tion­al finance and the cryp­to econ­o­my should be pit­ted against each oth­er. Both can coex­ist with­out the cost of the other.”

Chong doesn’t take this con­vic­tion for grant­ed. In his opin­ion, we’re going to see a lot of val­ue mov­ing on-chain exact­ly as a result of such col­laps­es with­in the tra­di­tion­al finance sys­tem. The ques­tion is whether the cryp­to mar­ket, with its own wave of dev­as­tat­ing col­laps­es in 2022, is ready to serve as a safe alter­na­tive to banks. In order to be the alter­na­tive to Trad­Fi, the cryp­to com­mu­ni­ty needs to come up with some stan­dards for how to man­age cor­po­rate assets. 

Chong added, “In the cur­rent envi­ron­ment, you need to be a cryp­to-native engi­neer to have any chance of keep­ing your blockchain assets secure. That’s not scalable.”

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